RPSM09101240 - Technical Pages: Member benefits: A secured pension: Scheme pension: Overview: Pension commencement lump sum

This guidance only covers the position where entitlement to a pension commencement lump sum arose before 6 April 2011. If the entitlement arose on or after 6 April 2011 see RPSM09104195.

Payment of a pension commencement lump sum in connection with a scheme pension

When a member becomes entitled to a scheme pension, the scheme rules may also give the member the right to payment of a lump sum.

If the lump sum payment falls within certain parameters, it may be paid tax-free. This is referred to as a pension commencement lump sum.

To be treated as a pension commencement lump sum, entitlement to the lump sum must be linked to the scheme pension entitlement, and it must be paid no earlier than 6 months before, and no later than 12 months after the date the member becomes entitled to that scheme pension.

A lump sum cannot qualify as a pension commencement lump sum where

• the member has reached their 75th birthday when entitlement to the lump sum arises,
• the member has already crystallised benefits for lifetime allowance purposes equivalent to 100% of the standard lifetime allowance,
• the scheme pension has arisen from a pension credit which, at the time the member became entitled to that benefit, was derived from benefits held by the member’s former spouse or former civil partner that were already in payment (what the legislation refers to as a ‘disqualifying pension credit’), or
• the scheme pension entitlement arises wholly from the application of an unsecured pension fund under a money purchase arrangement (as entitlement to such a lump sum could potentially have already arisen when those original funds were designated to provide unsecured pension).

The maximum pension commencement lump sum payable will be 25% of the capital value of the benefits entitlements arising at that point, i.e. the capital value of the scheme pension and the actual lump sum paid. Where the scheme pension arises from a defined benefits arrangement this capital value corresponds with the amount that will crystallise for lifetime allowance purposes in respect of those two entitlements through BCE 2 and BCE 6. Where the scheme pension arises from a money purchase arrangement, this capital value corresponds to the total funds as are applied towards benefits.

The maximum will be reduced on a pro-rata basis if the member exhausts the standard lifetime allowance as the lump sum/scheme pension entitlement arises, or if there is an element of pension credit or surrender of unsecured pension fund as described in the last two bullet points above.

If the member dies after receiving the lump sum payment, but before entitlement to the scheme pension arises, the legislation deems the entitlement to the lump sum to have arisen immediately before death. In those circumstances, the maximum amount that can be treated as a pension commencement lump sum is the available portion of the member’s lump sum allowance.

More information on pension commencement lump sums can be found at RPSM09104100.

If protection of existing benefits from 6 April 2006 is an issue, see RPSM03100000.